Understanding Different Payment Methods to Make Purchases

Available Payment Method Options Cash Check Debit cards Credit cards Online payments Mobile devices Payroll cards Layaway plans Automatic bank deductions

Paying with Cash Using dollars and cents Planning ahead Reduces impulse purchases Changes spending practices Has greater negotiation power Accepted everywhere Can reduce overall spending Important to be aware of your surroundings and how you handle your money. This method requires that you only spend the money you have available in dollars and cents and that you have that money directly available at the time of purchase. Paying with cash means planning ahead. If you make a purchase with cash, you must plan to have the cash with you, or you must leave to get the money and return later to make the purchase. There are some pros and cons to this payment method: A positive is that this method of payment reduces impulse purchases and in turn reduces your overall spending. Cash makes you more price conscious. You have limited funds, and you must stay within that amount. If you don’t have the cash with you, you must return for the purchase. This could result in more costs in gas and time. However, the added time will allow you the opportunity to think over your purchase and reduce buyers remorse (feeling bad about your purchase after the fact). Cash has negotiation power that other payment methods do not have, especially for large purchases. The visual stimulus of cash can assist you in reducing the purchase price. (Dave Ramsey – Foundations in Personal Finance) Cash is accepted everywhere. Unlike credit cards, checks, debit cards, etc., everyone accepts cash. It is mentally more difficult to spend cash than any other method of payment. Mentally, it actually registers the same in your brain as physical pain. This can reduce your overall spending and save you money—up to 18% according to Dave Ramey Foundations in Personal Finance. Using cash has a risk factor that other payment methods do not have—Loss. Yes, you can lose any form of payment method, but cash has no safety measures in place to secure or return your money. Often loss of cash just means it’s lost. This should not deter you from using cash. However, it should make you more aware of placing your money in a safe location and not making it visible to unnecessary eyes (limiting the potential of theft).

Paying with a Check Designed as an alternative to paying with cash. Must have amount available in account before making a purchase. Safe to send through the mail. Keep a register of purchases. Not all retailers accept checks. Paying with a check on the other hand means that you do NOT have to carry large amounts of cash with you. Checks are directly linked to your checking account and funds (the cash) must be available in the account BEFORE you make a purchase. If funds are not available, the check will bounce. Most businesses and your bank, will charge an Insufficient Funds Fee of up to $30 (in the state of Alabama) if your check bounces. This IFF fee can be very costly. Checks may be mailed to retailers as a safe form of payment. To stay current with your balance, you must keep a register of purchases. This also allows you to monitor your spending habits and make changes or adjustments to those habits and behaviors. Banks can take up to five business days (the amount of time it would take for the check to clear the check holder bank) to allow you access to the balance of the check. This delay could be forgone IF you have enough money in your account to cover the check if it bounces (not enough funds in the check writers account to cover the check). It is a business’s choice as to whether or not it accepts checks. This can limit the locations where you can make a purchase.

Paying with a Check Requires a bank account that can have fees associated with it. Purchase of checks Monthly service charge Personal information is visible on checks. In order to use checks, one must have a bank account with a financial institution like a bank, credit union, savings and loan association, etc. Often checking accounts will have a monthly fee associated with them. If you shop around often, you can find checking accounts that have no fees or very low fees, especially for students. Most checking accounts require you to purchase checks through your financial institution. Often the cost of checks is minimal, but it is still an expense. Checks are printed with personal information such as name, address, and account number. Often the business accepting the checks requires additional information such as driver’s license number and/or phone number in case there are issues with the check. This information will allow the business to contact you. However, you do not always know who you are giving your check to and this could leave you vulnerable to identity theft. Many institutions will charge a fee to cash a check. This generally does not apply to YOUR financial institution that you have an account with but to those institutions that you do NOT have an account with. These fees can become costly.

Paying with Debit Cards Tied directly to your checking account. Some accounts require an additional fee. A PIN is necessary. May be used at ATMs. Cash-back option. Prepaid debit cards limit risk. Debit cards are directly linked to your checking account and therefore require a bank account. The same stipulations that were discussed in the “Pay by Check” section apply to debit cards. Some accounts require an additional fee for using a debit card; however, if you shop around, you can often find a checking account that does not have a fee for debit card use or that charges a nominal fee. Debit cards may be used in an ATM (Automatic Teller Machine) to retrieve cash from your account at any time of the day. However, some ATMs may charge a fee based number of withdrawals and/or for ATM usage at other institutions (out-of-system usage). Debit cards may offer a cash-back option when making purchases at certain stores. This is another way of withdrawing cash from your account. You should keep a register of your debit transactions in addition to your check transactions to prevent over drafting (spending more money than you have in the account). The bank will mail you a statement each month to review your transactions and to reconcile with your records.

Paying with Credit Cards Borrowed Money!!! Must have approval from a financial institution to obtain a credit card. Interest applied to balance. Membership fees. Affects your credit score. Can be used for purchases in any store that accepts the form of credit card. When using a credit card you are NOT using your own money. You are borrowing the money from a financial institution. Because you are borrowing the money, the financial institution must approve you before you can obtain its credit card. This process requires that you fill out an application and submit it to the financial institution. Upon approval, a card will be sent to you with a monetary limit on the account. Most credit cards come with a “30 days no interest policy”, but after that initial 30 days from purchase, interest begins to apply. Credit card interest rates are very high in relation to other banking loans, often 19%-22% APR (Annual Percentage Rate). Although you can pay off your credit card every month and accumulate no interest, statistically that is not the norm. Over 80% of all credit card owners regularly pay interest on their credit card loans. Statistically you will most likely fall into that category. Some credit cards have membership fees (ex: American Express). These credit cards give their members extra benefits for using their credit cards to make purchases. The benefits could include (but are not limited to) extra securities on their purchases, extended warranties on items, replacement policies, etc. Your payment record on your credit card will apply towards your credit score. This means if you pay your credit card appropriately, it will positively affect your credit score. If you pay late, pay less than the full monthly payment amount, or miss a payment, it will negatively affect your credit score. If you have too many credit cards, this too could negatively affect your credit score. Forms of credit cards include Visa, MasterCard, American Express, Discover. However a company is NOT required to accept credit cards for purchases.

Paying with Credit Cards Types of Credit Cards Universal Cards Visa, MasterCard, Discover, American Express Company Specific Credit Cards Often limited to use in that store In-store rewards Universal credit cards include Visa, MasterCard, Discover, and American Express (the most common) and can be used where that form of credit card is accepted. Company-specific credit cards are often limited to purchases with only that business. Company-specific credit cards often come with perks such as special coupons, discounts, customer rewards, birthday gifts, etc.

Paying with Payroll Cards A type of bank debit card issued by the employer. Draws on the user's wages or salary instead of a deposit account. Users access their money from an ATM or cash-back purchase in the same manner as with a traditional debit card.  Negatives to payroll cards : Fees Dealing with lost card Negative: Customers can be flooded with a variety of fees when trying to access their money (ATM fees, Point-of-Sale fees). Loss of a card can be very financially stressful until a replacement card can be issued.

Paying with Layaway A buyer selects the items that he wants to purchase, and the company holds those items until payment is made. Often the company requires a minimum initial payment and will only hold the item for a certain period of time until the full payment is made. This form of payment is most popular during holiday seasons.

Paying with Automatic Bank Deduction You ask your bank to automatically pay a specific bill out of your account. This method of payment is generally used to pay regular bills. Automatic bank deduction is often called a bank draft.

Paying with Automatic Bank Deduction Issues: Bank pays late or not at all. Bank pays after a request to stop payment. Bank pays too much or too little. Troubleshooting If payments are not being made to accounts, this could have devastating results and not to just your credit score. If payments are not being made to accounts such as insurance, you will lose your policy coverage. Regular stable bills = monthly bills with the same amount due. Sometimes the bank will cover late fees. Go in person to handle any changes to payments. This will decrease the likelihood of error.